Earnings Yield
Earnings yield flips the P/E ratio upside down: earnings per share divided by price, expressed as a percentage. It states what a stock pays in profit per dollar invested, which makes it directly comparable to bond yields and to every other asset competing for the same capital.
The math
A company earning $8 per share at a $100 price offers an 8 percent earnings yield, the same information as a P/E of 12.5 in a more useful shape. Put $50,000 into it and the business generates $4,000 of profit on your behalf each year.
The same $50,000 in a stock trading at 25 times earnings buys only $2,000 of annual earnings power.
| First stock | Second stock | |
|---|---|---|
| P/E ratio | 12.5 | 25 |
| Earnings yield | 8% | 4% |
| Earnings on $50,000 | $4,000 | $2,000 |
Against a hypothetical ten-year bond paying 5 percent, the first stock clears the hurdle with room to spare; the second needs meaningful growth just to compete with a coupon.
The trap
The fattest yields often sit on the least reliable earnings. Cyclicals near a peak, companies coming off one outsized year, businesses in slow decline: all print high earnings yields right before the denominator collapses.
A 12 percent yield computed on earnings about to halve is really 6 percent, and the share price usually adjusts before the income statement does.
The move
Treat earnings yield as a hurdle-rate test, not a buy signal. Compare every candidate against long-term bond yields plus a premium for equity risk, and compute the yield on normalized earnings rather than last year’s print.
When the spread between a stock’s earnings yield and bond yields runs thin, growth has to do all the work; verify the business can actually deliver it before paying for the promise.